Ladies and gentlemen, thank you for standing by. Welcome to the TJX Companies Third Quarter Fiscal 2021 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded November 18, 2020. I would like to turn the conference call over to Mr. Ernie Herrman, Chief Executive Officer and President of The TJX Companies Incorporated. Please go ahead, sir.

Thank you, Jordan. Before we begin, Deb has some opening comments.

Thank you, Ernie, and good morning. The forward-looking statements we make today about the company's results and plans are subject to risks and uncertainties that could cause the actual results and the implementation of the company's plans to vary materially. These risks are discussed in the company's SEC filings, including without limitation, the Form 10-K filed March 27, 2020 and the Form 10-Q filed August 28, 2020. Further, these comments and the Q&A that follows are copyrighted today by the TJX Companies Inc. Any recording, retransmission, reproduction or other use of the same for profit or otherwise without prior consent of TJX is prohibited and a violation of the United States Copyright and other laws. Additionally, while we have approved the publishing of a transcript of this call by a third-party, we take no responsibility for inaccuracies that may appear on that transcript. Thank you. And now, I'll turn it back over to Ernie.

Good morning. Joining me and Deb on the call is Scott Goldenberg. I'd like to start our call today by expressing our sincere gratitude to all of our global associates for their continued hard work and dedication as we navigate the business through this health crisis. They have helped us achieve monumental tasks over these past eight months. We are especially proud of their commitment to our health and safety protocols for both associates and customers. I want to give special recognition to our store distribution center and fulfillment center associates. We are truly grateful for their commitment to keeping our business open and moving forward, which requires them to physically go into work. In recognition of their efforts, we have once again awarded a majority of them an appreciation bonus to be paid in November, this month. We will continue to look for opportunities to recognize associates in the fourth quarter for their continued contributions to the business. As we keep managing through the global pandemic, I want to share our continued concern about the human impact of COVID, including on our associates and customers. I know the news around the resurgences is difficult for all of us to see. As an international retailer with operations around the world, we continue to follow government mandates in our regions, which means at this time we have some stores temporarily closed. Currently, the vast majority of these are in Europe, with only a very small number in North America. Moving to the business update. I'm going to start with a recap of our third quarter results followed by some comments on the fourth quarter and then move to the market share opportunities we see for TJX in the medium and the long-term. Now to our third quarter results. I am very pleased that both our sales and earnings per share well exceeded our plans. Overall open-only comp store sales were down 5% and earnings per share were $0.71. Further, sales exceeded our plans across each of our divisions. Our above-plan third quarter results reinforce our confidence in the flexibility and strength of our business model over the long-term. The third quarter marked the first quarter this year that nearly all of our stores were open. Despite the numerous macro headwinds, including COVID and its impact on consumer behavior and the limitations in cost of operating with new safety and occupancy protocols, we generated strong cash flow and saw a strong rebound to our top and bottom lines. We are convinced that we can continue our successful profitable growth once we are past this health crisis and the environment normalizes. To provide more detail on the drivers of our above planned sales in the third quarter, we believe that the combination of improved merchandise mix, higher store inventory levels, our focus on safe in-store shopping experiences and the restart of our marketing campaigns were all factors. First, we significantly improved our assortments and the seasonality of our product. We have made progress in flexing our buying dollars and shifting to higher demand categories. We saw strength in our Home, Beauty and Activewear categories across Marmaxx, TJX Canada and TJX International. It's great to see consumer seeking out our banners for the categories that they currently deem important. Our buyers have done a terrific job delivering great merchandise and values throughout the store for all of our categories including both the hot trending categories and the softer trending areas. Second, overall inventory availability and the buying environment are excellent. Our buyers have done a great job communicating with our vendors and leveraging our global buying offices in this environment. We've also added hundreds of new vendors this year. Our merchandise flow to stores has improved since last quarter and we felt good about bringing customers the terrific values they expect from us in the third quarter. We are -- we expect our inventory flow to incrementally improve throughout the fourth quarter. I especially want to highlight the outstanding sales results at our HomeGoods banner, we believe that our aggressive expansion of HomeGoods over the past five years has positioned us very well to capture outsized home share in this environment. Next, our merchandise margin was up significantly, with excellent overall inventory availability, mark-on was very strong. Markdowns were also better than anticipated as sales exceeded our plans and consumers responded favorably to our fresh merchandise mix. We also continue to receive very good feedback on our health and safety protocols from customers who have shopped in our stores. Our marketing organization works very closely with the store operations teams to develop clear and helpful signage to convey our commitment to a safe shopping experience to our customers. We believe our health and safety focus will be important to consumers as they decide where they are comfortable doing their in-store shopping this holiday season and beyond. Lastly, we generated very strong cash flow and further increased our liquidity during the third quarter. As we announced today, our current financial liquidity and flexibility gives us the confidence to reinstate our quarterly dividends subject to Board approval. We expect the dividend to be at an increased level compared to the last dividend we paid in March. Scott of course will talk more about this and the tender offer we announced this morning in his financial update in a moment. Moving to the fourth quarter and our opportunities for the holiday selling season. First, we are convinced that we will be a gifting destination again this holiday season. With our wide selections across many merchandise categories, we believe customers will find gifts for everyone on their list in our stores and online. And our treasure hunt shopping experience offers customers the element of discovery when they're looking for some inspiration for what to buy for the people on their holiday list. Second, we plan to flow fresh product multiple times a week to our stores and online throughout the holidays so that shoppers can find new gift giving assortments every time they shop us. Next, we believe our holiday marketing campaigns which started airing earlier this month will help drive customer traffic. We are highlighting our terrific gift assortments and excellent values with messaging such as spend less, gift better and big love small prices. In the U.S. and Canada, we will leverage the strengths of our retail brands together and multi-banner campaigns. In Europe, we are leveraging our campaigns across each of our European countries. As to e-commerce, we continue to add new categories and brands to our U.S. and UK online businesses. This holiday season, we are planning to offer an expanded assortment of gifts for those shoppers who prefer to shop online. We feel very good about what we have planned this holiday season. However, we continue to see significant COVID-related headwinds that we believe will make it difficult to achieve the level of sales that we would normally expect during this time of the year. First, is the recent resurgence of COVID cases and the consumer impact, in addition to leading to more temporary store closures, this also continued the uncertainty around shopping behavior. We see some consumers are still reluctant to shop in stores and others may make fewer shopping trips this holiday season. Again, we believe our health and safety measures will encourage consumers who are comfortable doing in-store shopping this year to return to our stores. Second, we anticipate some pressure during peak shopping times in some stores from occupancy limits and social distancing protocols. We have several initiatives planned to help mitigate some of this pressure and to improve traffic flow and speed of checkout. Lastly, we are seeing softer demand for certain product categories given the number of people continuing to spend more time at home. While we are emphasizing the high demand categories of Home, Beauty and Activewear, there is a limit to how much of our mix we would shift in the short-term to medium-term. Medium to long-term, while much of what I just discussed our macro headwinds that could persist until a vaccine is widely available and the environment normalizes, we feel very confident in the market share opportunities we see ahead. We are laser focused on the continued successful growth of TJX and seen numerous opportunities to leverage our strengths. First, we are convinced that our great brands at great values concept is an enduring retail formula that we will continue to be a major draw for consumers. Our surveys tell us that our customers love our differentiated treasure hunt shopping experience and we are convinced that this will continue to service extremely well when more consumers are comfortable shopping our stores. We believe our value proposition gives consumers a compelling reason to shop us in this environment and will continue to attract shoppers over the long-term. Second, we believe our relationships with vendors will grow even stronger as other retailers close stores. We see the power of our global sourcing from a universe of over 21,000 vendors as a tremendous advantage. Next, is the flexibility of our buying, store formats and distribution networks, which we see as a key strength in a rapidly evolving retail landscape. This flexibility allows us to offer consumers a broad mix of branded merchandise across a very wide consumer demographic. Fourth, we see a significant opportunity to continue our global store growth over the long-term. We are in an excellent position to take advantage of real estate availability to open new stores and relocate existing stores. Further, we plan to continue remodeling stores to further upgrade the shopping experience. As we look to capitalize on opportunities to attract more new customers in the future, we want them to have a positive shopping experience when they visit us to keep them coming back. Lastly, we see a great opportunity to capture additional share of the Home category, which has been strong for us for many, many years. In the short-term, we have been increasing our Home mix at all our banners to capture our piece of the incremental demand that is out there. Going forward, we believe the strength of our buying team which numbers over 400 Home buyers, our global buying offices and strong relationships with vendors around the world will allow us to capitalize on the best merchandise available in the marketplace and bring our shoppers exciting home fashions at terrific values Today, I am excited to share with you that we plan to launch e-commerce on HomeGoods.com later next year. We believe HomeGoods e-commerce will allow us to leverage both our strength in the home category and the power of our global buying organization and sourcing universe. We believe this will allow us to satisfy our current customer base which is expanding and continue to attract new shoppers. The passion of our HomeGoods customers is terrific to see, and we are looking forward to bringing them our great brands and values 24 hours a day, 7 days a week. In closing, I want to reiterate that the entire management team is laser-focused on navigating through these times to ensure the stability of the business in the short-term. At the same time, our sight remain on our strategic vision for the medium- and long-term and capitalizing on the numerous opportunities we see for our business. We are prioritizing our investments in our associates, stores, supply chain and systems to strengthen our infrastructure in positioning to execute on our growth plans. We believe we are in excellent shape to build on our leadership positions in the U.S., Canada, Europe and Australia over the long-term. TJX's successfully grown its business through many retail and economic cycles throughout our 43-year history, and I believe that we'll come out of this health crisis an even stronger company on the path to even greater success in the future. Again, and most importantly, I want to thank all of our associates worldwide who have shown an amazing commitment to TJX and have done outstanding work over these past eight months. Now, I'll turn the call over to Scott for a financial update. And then we'll open it up for questions. Scott?

Thanks, Ernie, and good morning, everyone. I'd like to first echo Ernie's comments and thank all of our global associates for their hard work and commitment over these past eight months. Now, to Q3 results. As Ernie mentioned, open-only comp store sales were down 5%. We were very pleased that overall sales and sales across all of our divisions well exceeded our plans. Overall customer traffic was down but improved versus the second quarter. Average basket increased and was strong again as customers responded favorably to our fresh mix and put more items into their carts. Merchandise margin was up significantly this quarter, driven by stronger mark-on and lower markdowns which included a benefit due to the timing of markdowns between the second and third quarters. As to the cadence of sales, overall open-only comp store sales were sluggish in August and improved significantly for the remainder of the quarter, with September being the strongest month. While hard to quantify, we believe much of this improvement was due to a combination of a more seasonally, appropriate merchandise mix and improved in-store inventory levels as the quarter progressed. Moving to the bottom line, third quarter earnings per share were $0.71 which was significantly better than we anticipated. Earnings per share included a $0.09 benefit from our lower tax rate versus last year which was due to a true-up of our year-to-date tax rate as well as the shifting of income and loss positions across our operating jurisdictions. I want to also remind you that our EPS reflect significant cost headwinds related to COVID. Similar to the second quarter, in the third quarter, these costs primarily included incremental payroll in our stores for enhanced cleaning and to monitor occupancy. Personal protective equipment for our associates and incremental expense related to the third quarter associated appreciation bonus. In total, COVID costs accounted for approximately $270 million of incremental expense in the third quarter. As for our third quarter balance sheet inventory, the decline was due to a combination of items. First, we intentionally planned lower in-store inventory levels to accommodate social distancing and to account for the planned decline in our year-over-year sales. Second, sales were stronger than we expected in the third quarter, so we were replenishing our inventory quicker than we planned. And lastly, we continued to experience merchandise delivery delays due to continued bottlenecks in the supply chain. While overall inventory was down in-store inventory levels improved significantly compared to the second quarter and are close to where we want them to be in this environment. To be clear, availability of merchandise in the marketplace is excellent and is not a factor impacting inventory levels. Now, I'd like to walk through our third quarter cash flow and liquidity. During the quarter, we generated $4.1 billion of operating cash flow. This was primarily due to an increase in working capital and strong net income. We also benefited from lower capital spending and maintaining tight expense controls during the quarter. As a result, we ended the third quarter in a very strong liquidity position with $10.6 billion in cash. With such a strong liquidity position, we were very pleased to announce that we expect to reinstate our quarterly dividend in the fourth quarter, subject to Board approval at a rate of $0.26 per share. This would represent a 13% increase versus our previous dividend of $0.23 last paid in March of 2020. If approved by the Board in December, the dividend will be paid in March of 2021. Next, we announced this morning that we launched cash tender offers for up to $750 million aggregate principal amount for certain of the bonds we issued in April of this year. The goal of these tender offers and the financing, I'll discuss shortly, is to lower our borrowing costs by reducing the outstanding amount of our higher interest rate longer-dated bonds and issuing lower interest rate bonds. While we cannot give specific guidance at this time, if any of the bonds are successfully tendered, we would incur a pre-tax cash charge in the fourth quarter related to the extinguishment of this debt. Keep in mind, if nobody tenders their bonds, the charge will be zero, if $750 million of bonds are tendered, the one-time pre-tax charge could be in excess of $225 million. We will disclose the results of the tender offers and the approximate size of the extinguishment charge when available. We also disclosed this morning that we plan to issue new bonds maturing in seven and 10 years. We plan to use the proceeds of this offering together with the cash on hand to finance the tender offers, which are conditional on our issuing the bonds. We may also use some of the offering proceeds for general corporate purposes. As we said in our release, we are not providing a financial outlook for the fourth quarter due to COVID and the increasing uncertainty around temporary store closures and the consumer shopping behavior in this environment. As a point of reference for the two weeks of the fourth quarter, overall open-only comp stores were down 7% similar to the trend we saw in the last week of October. As a reminder, regardless of comp sales trends, overall sales for the fourth quarter will be negatively impacted due to temporary store closures. That said, I do want to highlight a couple of significant items that negatively impact our fourth quarter bottom line versus last year. First, we're expecting an increase in the amount of incremental COVID costs compared to what we saw in the third quarter. Second, there will be a negative impact due to the temporary store closings which are most currently mostly in Europe. Lastly, we expect higher incremental freight costs in the fourth quarter due to capacity constraints and higher rates. I also want to mention from a sequential standpoint, merchandise margin in the fourth quarter will not get a benefit from a shift in markdowns like we had in the third quarter. And further fourth quarter freight expense will be significantly higher than what was in the third quarter. Wrapping up, I want to reiterate the strength of our third quarter results, while operating in a non-optimal environment. We believe that our third quarter sales, earnings and cash flow demonstrate what TJX is capable of when nearly all of our stores are open for a full quarter. We believe we have been prudent in our financial approach to planning the business and management of our balance sheet and we ended the quarter in a very strong liquidity position. We are confident in our ability to manage the areas we can control like buying, merchandising and store operations. We have a proven retail business model and we believe we are set up very well for continued success once this health crisis is behind us. Now, we are happy to take your questions. To keep the call on schedule, we're going to ask that you please limit your questions to one per person. Thanks, and now we will open it up to questions.

Thank you. [Operator Instructions] Our first question comes from Matthew Boss [JPMorgan]. Your line is open.

Great, thanks. And congrats on the business improvement. So Ernie maybe where do we stand today with inventory replenishment and supply chain constraint relative to our conversation three months ago? And just given the industry disruption as a whole, what's your confidence in accelerating market share out of this pandemic? Maybe if you could just touch on some of the off-price industry barriers to entry that you think are important?

Sure, Matt. Let me hit a high point, first of all, to separate at a high level the short-term versus the longer-term. So the short-term environment is really addressing the big picture you're getting at as what happened to stock price and to us, TJX as we kind of come out of this. The short-term environment right now, we would say is a little more volatile than it was at the beginning of the third quarter, when you look at on COVID cases rising, which were in multiple locations. So it's not just the U.S., we're talking Europe, U.S. everywhere pretty much we are. As we mentioned, we have a number of stores, over 400 stores closed in Europe right now. So it's a little more volatile short-term, however, I'm going to give you a complete 180 and just say we are very bullish on the longer-term outlook because that feels significantly better than it did at the beginning of Q3 when we didn't know where all of this was heading, Certainly the recent news of the vaccines and what that could do in terms of helping, as Scott mentioned, when customers get comfortable shopping stores in general, I think we are going to be positioned extremely well to come out of the box and gain more market share from brick and mortar or across many categories not just in the home area throughout the whole store, I think we're going to be positioned. So, if you look at all the store closures that have happened and I'm guessing you're kind of getting at that issue where this market share opportunity, but how is our inventory replenishment, I think you asked in the beginning on supply constraints et cetera, that we see getting incrementally better month-by-month as we move forward here. Certainly, there has been some, as you probably have heard industry wide, there were some West Coast slowdowns that have impacted some categories, but not to the point, in our case, where it has really saddled or had a material effect on our flow because we are actually right now fairly happy or pleased with the amount of inventory we have in really all of our divisions, all of the brick and mortar specifically. Of course, in Europe, right now, it's being shut down for a few weeks doesn't matter with regard to inventory, but we're feeling really bullish medium-term, long-term, inventory replenishment availability is pretty high. We've had to recently slowed down all of our buying and most of the divisions and departments within the stores because the availability out there is just as you might expect, it's more than it was a number of months ago, and I think that's just has to do with the cadence of the wholesalers now trying to get back on track and project where retailers are going to be and bring-in more goods. So, hope that answers your question with regard to inventory replenishment, supply, where we think the short-term is versus the long term. Again, this is why you're seeing us be a little more cautious on the fourth quarter because of the volatility out there. But again as we look into next year, feeling very good.

That's great. Maybe, Scott as a follow up, could you just help quantify the magnitude of merchandise margin expansion in the quarter, what drove the performance? And then with inventories lean exiting the quarter, what's the best way to think about merchandise margin opportunity in the fourth quarter?

Well, the last part I'll have Ernie just jump in right there because I think I'll just briefly and I'll get back after Ernie talks. But our merchandise margin was strong across the board, across all our divisions. The mark-on was extremely strong and I think...

Significantly.

And I think that in terms of the fourth quarter.

And markdowns were also, Matt, this wouldn't surprise you because we were lean through a lot of that third quarter and we're still lean. And the way our sales were, I don't want to say, only down 5%, but down 5% was well ahead of where we had thought they would be based on the environment and the inventories, our markdown rates were all much better than last year. The percentages were less than last year, which was healthy. Inventory levels we show were lean, but if you walk into our stores right now, and this is any brand -- if you walked into Winners, TJ Maxx, Marshalls, HomeGoods you would feel the inventory levels feel very appropriate based on social distancing, the way consumers shop versus three months ago, inventory average, store inventory levels are less than they are at this time of the year. So when you say you're down whatever the number is whatever percent you are against those levels, the stores are going to feel a little more naked than they are today. So, today they feel very appropriate when you walk in our store, inventory levels, which is why we're saying we're happy with them. We're happy with the way the turns are right now. They are not extreme in either direction, not to light, not too heavy. But again, we're trying to watch with what's going on the safety protocol and the social distancing and balancing that whole store experience with our sales.

Yes, And just Matt to just go on a little in terms of the rest of the merchandise margin. There was the timing of the markdowns so that was significant worth approximately 50 basis points that benefited us in the third quarter. Having said that, we still were up -- we were up still quite a bit on the markdown so HomeGoods in Canada drove the majority of that as HomeGoods as you'd expect given the comp they had with chasing the inventory we had very few markdowns compared to at any point at HomeGoods. So that was certainly the driver of that but also strong markdown performance in Canada. In our gross profit, we also had savings in some of the things that get booked into their like travel and other things that we had savings where we also had some government credits and other things that get booked into that we're also saving. So -- and then, there was a small benefit -- well not small but 30 basis points benefited from the hedges in the quarter. But having said all that, yes, it was still an extremely strong merchandise margin in the quarter.

Best of luck.

Our next question comes from Omar Saad [Evercore ISI]. Your line is open.

Thanks, good morning. I appreciate all the information guys. I wanted to ask a follow-up on your confidence in the market share opportunity longer-term, if we think about the consumer kind of step function migration online during this pandemic, is your confidence based on consumers kind of re-migrating away from online and coming back to stores, I know traffic isn't quite back to where it is, if you have any data around that or especially given the HomeGoods e-commerce announcement, are you -- do you have greater confidence that you're going to be able to get greater penetration in the digital channels and gain market share that way or is it a combination of both? Thanks.

Great question, Omar. First of all, combination of both? Definitely. I would say way more impactful on the store capturing the market share opportunity with the stores. And the HomeGoods -- why I'm excited about the HomeGoods online business is as we believe it's very complementary to, I think even I've talked about this before. That is a group of some of our most-passionate customers are our HomeGoods customers. so clearly -- and then a lot of Home business is being done online and so there is a just such a big territory out there of market share we can go to grab from. But a bulk of the market share I still think is customers as witnessed by what the HomeGoods has been doing in comps recently, there's just a bulk of customers that really want to go shop our stores, and the market share opportunity as people get more comfortable for them to come back to our stores, we can just tell from what's been happening now in any area where it's normalized, we're running some really strong numbers -- sales revenue numbers in those markets. So the store closures issue across the country on brick and mortar because at the end of the day X percent of customers still would like to go to stores and not everybody wants to buy their apparel even online. They don't always want to buy a sofa, a chair, an accessory and they want to fill the fabric. Again we've talked about this before that when things normalize, we should get the increased market share because of all the store closures that have happened with brick and mortar. I believe we're going to capture a lot of that coming out of this. So it's a little of both, but I would say the store pickup is really where -- in the Home, I think HomeGoods will be one of the healthiest divisions as we move forward into next year in terms of the ability to just keep capturing, especially in the medium-term. Long-term, I think, as businesses start to gain and the vaccines kick in, I guess you could argue people will be less at home more, but I do believe businesses across the country and in other countries do have an X amount of employees stay at home that weren't at home. So if that's 25% of the office workforce base at home that wasn't that should still give win to the HomeGoods business I think for a handful of years.

Our next question comes from Kate Fitzsimons [RBC Capital Markets]. Your line is open.

Yes, hi, thanks very much for taking my question. Ernie you sound obviously very bullish on HomeGoods market share opportunities, can you just speak to maybe how you're evaluating longer-term store count especially within that division. It seems like certainly you feel pretty optimistic about some of the opportunities out there? And then just as Home becomes a bigger piece of the mix, what are some of the margin implications we should consider just given higher freight typically associated with that category? Thanks very much.

Sure, Kate. I'll start off and then I'll hand it over to Scott. The -- on the store comps, we've started to -- obviously when COVID first started, we put a little bit of the brakes on, but we only did that for a number of months. And now if we look out, I think Scott might have it as we look out to fiscal '23 calendar '22. Well, first of all, we're still opening stores next year and then the year after we have now started to ramp those up a little bit because we're bullish on it. There is a great real estate opportunity out there as we've talked about. So what we wanted to do and this applies, by the way, with relocations in Marmaxx or in new stores and with HomeSense in Canada or our Home business is great across the board, but specifically HomeGoods, we've started to get more aggressive on FY '23 openings. Scott, I don't know if you want to jump in on that.

Yes, I think it's across the board. I think we have, I mean, again we -- as we've talked about the last two quarters we slowed down significantly. A lot of our openings this year that even on stores that we had signed and moved them from fiscal '21 to fiscal '22 or calendar '21. So this year, we're opening up approximately 50 stores. Next year, already in the hopper well north of 100 and will be harder than that, we're just not giving out our plans, but as Ernie said, we're signing stores across all of our divisions. And for fiscal -- and certainly signing stores for calendar '22 and we'd expect to have start growing up into that at least that 3% range of store openings as a percent of growth. There is a lot of opportunity, as Ernie said in his prepared remarks, so it's not just the store openings, we're able to relocate a lot of stores which we're going to be repositioning. And I think we'll be back on track of relocations next year across all our divisions with certainly a lot of opportunity in Marmaxx as well and then obviously with leasing renegotiate and above, so I think there's a lot of opportunity in the real estate and we're starting to, as Ernie said, sign those. So too early to give numbers for what next year and the year beyond look, I just won't be in the triple -- will be well north of 100 openings and growing significantly.

I'll just jump in with one other thing, Kate, we're talking about HomeGoods total but another place where we're tweaking that and we'll be opening some stores because our trend there has also been strong is with some HomeSense stores scattered amongst the other total HomeGoods stores. So if there is -- if the real estate deal is right and it's near a HomeGoods right, Scott, we're going to take advantage of that with some additional HomeSense stores as well. Even though we might already be in the market again with the HomeGoods, again, as we've seen our cannibalization when we open up a HomeSense right near a HomeGoods has been close to non-exist if anything we're seeing a slight lift with the HomeGoods so because of differentiation. So again, that's our other vehicle. I know, we don't talk about it as much, but it's been performing well over the last six months.

Great. Best of luck.

Our next question comes from Lorraine Hutchinson [Bank of America Merrill Lynch]. Your line is open.

Thanks, good morning. I wanted to ask about SG&A, you spoke about the $270 million of incremental cost this quarter. Clearly you sounds some offsets, so I was just wondering what those were and if there will be ongoing savings? And then secondly, will the entirety of the $270 million COVID costs go away post vaccine?

So I'll jump in just to start on that and then I think what Ernie was alluded to in terms of the encouraging news on the vaccine is that over time stuff like the COVID costs will slowly get better. But right now, it's too early to say when our COVID costs are going to be decreased in the in-store.

Right, my focus on that statement was more about the sales there. It was really about Lorraine the benefit we're going to see over time, all it needs is a few point swing in consumer comfort, the consumer feeling more comfortable to shop brick and mortar and that literally translates into a few point increased trend in our sales. So that's really what I was referring to.

But in terms of the COVID costs at this point it's too early to say that we have no plans at this point to be reducing our COVID costs, I mean when they reduce I guess we'll know there when we get there, but we're not going to be doing that until customers are going to be comfortable shopping in our store and taking those cost away. So at this point for the fourth quarter and then we'll address it as we get to year-end, we would expect to have the full amount of COVID cost continue to be implemented. In terms of the offsets to that and the third to fourth quarter, yes, we do have government relief that we've been getting, particularly in the third quarter from Canada and Europe that are still -- that were offsetting the cost unfortunately that will be decreasing in the fourth quarter as we will not have some of the subsidiary -- subsidies that we had in the third quarter so the net will be going up a bit. Also, as we increase our hours, we do -- we are increasing our costs for COVID in the fourth quarter, offsetting some of that is we've had pretty good savings in the third quarter on advertising, travel and other payroll related areas some of which we've talked about as we do have some closure of our fitting rooms et cetera. Some of that will be reduced as we open up the business and are spending money on marketing, we will have less savings so we would expect some of the net cost for COVID to go up in the fourth quarter. But overall, the net COVID costs and why we delevered 160 basis points of SG&A is the COVID costs were up a bit in the third quarter, but still we didn't have enough savings to offset that.

If I could just also jump in Lorraine. One thing we're conscious about where we think it's a benefit to us coming out of this is really the last and we want to give up the strangely enough on the COVID cost is because we're getting a lot of credit with the consumer on our safety measures that we put in and with our associates, and then we get this from survey data where we're surveying constantly in different stores throughout the country and we're getting high scores which is one reason we think we're doing as well as we are actually. We believe our sales wouldn't be this good if the customers that are willing to shop brick and mortar right now are coming into us and based on the surveys that we've been doing are feeling safe and the experience of safe and organized. And so we know we're spending to do that, I'm almost looking at that spend is, yes, safety for our customers and our associates number one priority, it's almost indirectly a marketing business getting spend at the same time and I think that's going to plant a loyalty issue with customers coming out of this as we move forward. So to Scott's point, we are not -- on the COVID costs we're not letting go off those too quickly because we think it's helping our top line.

That makes sense. Thank you.

Our next question comes from Paul Lejuez [Citi]. Your line is open.

Hey guys, thanks. A couple of quick ones. Ernie, you mentioned you signed up hundreds of new vendors this year. I think you do that every year, so I'm curious if you've seen any difference in the vendors that are coming on board with you haven't come categorize them versus what you would see in a normal year? And Scott, payables, inventory relationship looks a little out of whack, just curious if that's something that'll go back into normal, if so when and where there were something that has changed as a result of this environment and that will continue to benefit you in future quarters? Just those two items. Thanks.

Sure, Paul. So the first one, very good merging question. Yes, there is a little different complexion on the new vendors because what's happening is they have tended -- on the new ones have tended to not be the big, huge, enormous household name vendors. They've been some of the more we would call them icing more niche type vendors that add a nice flavor to our mix because some of those vendors where historically they haven't had that many goods or the need because they're not huge vendors, but they give a nice eclectic excitement level to our mix. So it's been really need for us to -- and I get recaps frequently from the divisions, it's shown that we've really opened some vendors recently and we didn't think there were many vendors left that we weren't doing business with, but there are some of these niche vendors that we've actually been doing more business with in the last quarter that are making up more of those new vendor numbers then we had had before, whereas before you would have -- we'd open up more of the mainstream guys always new. Now, we've had some of these more special guys sometimes not huge quantity, by the way, but it's great because you feel there is a relationship that just started that should benefit us next year and the year after. So great, great question. It is a way -- because it's not just about the numbers, to your point, it's about the quality of who we're opening up.

Yes and Paul in terms of the overall inventory levels. I think, as Ernie said, we started to get to the level at the stores that we wanted to be, I think store inventories will still remain lighter than last year primarily due to social distancing and having planning our inventory ourselves lower than last year. So I think that will remain probably pretty constant and we're still chasing the good so we're -- overall DC level inventories will be lighter than at the end of the year than they were in the previous year. I think they will go down a bit from where we are now as going back to some of the efforts to Ernie alluded to in terms of mitigate the impact that the supply chain has, but overall we'll go down, but we will still not have the same levels. Just to be clear when you looked at the two previous years, we had some fairly significant inventory increases that we're going against and some of that was in the distribution center. So, when you look at it on a two or three year stack, it's not as different but I would say the big difference is just we'll have less distribution center inventory than we normally would have, and I think the overall freight aspects of it, we're going to be getting better, but it's still, as you probably heard from others the -- some of the capacity and other freight issues were not going away. I think we're just doing a good job paying for it to get the inventory into our locations this year.

Scott, I was also asking about the payable relationship, inventory niche you've seen something change there on a more permanent basis or if that degradation that ratio might go back to something more normal?

That will be what we've seen is we had increase some of our payable terms across the board. We have decreased them but still at levels higher than what we well they normally would have pre-COVID that would be, to be determined, as we go through the next year. So obviously a lot as I in the prepared remarks said, a lot of our benefit had to do with the A, lower inventory levels but also significantly higher payables balance. That should start to normalize and that -- and some of that will flip as we move into next year. So it'll still be a bit higher in terms of the terms but it is going down.

Got it. Thank you, guys. Good Luck.

Thank you.

Our next question comes from Kimberly Greenberger [Morgan Stanley]. Your line is open.

Great. Thank you so much. Ernie the long-term benefits in terms of just the positioning of the business was very, very clear. And obviously here in Q3, we saw exactly how resilient the business is, so it makes a lot of sense. I wanted to ask you about two things. First, the operating margin in the quarter even with the incremental COVID costs and I understand Scott that were a couple of different discrete items that benefited gross margin, but the operating margin on the business here in the third quarter was very much in line with what you've delivered for the last two years in the third quarter. So I'm wondering if there has been any learning in -- through this COVID period or any kind of efficiencies that you've been able to glean that would potentially allow you to deliver higher margins post COVID than pre-COVID?

Right. See yes so Kimberly I get exactly where you're getting -- obviously, we're very pleased with the margin coming out of this. One of the dynamics that's going on to help offset the COVID cost is the extremely healthy merchandise margin, which the question is when we come out of COVID, will that still be to that degree and it's kind of a, you're in a weird situation where we're taking advantage of coming out of COVID and we're still doing this now as well as we look out what we've placed the opportunities in the marketplace at the mark-up, I think that Scott referred to has just been very advantageous. Do we believe there is some of that opportunity in the future? I believe there is some of it because we will mean more now even more than we did before to many of these vendors because of so many of the brick and mortar, guys going out and we're so branded focused. So if you're a key branded player and you want to deal with a solid retailer who is also again not very visible with the product, right, and it's part of a treasure hunt shopping experience, I believe there will be some benefits still going forward. I just don't think we will be able to maintain as to this degree. However, do I think we've learned some things from it to probably come out of this and say, hey, we've learned some ways to buy and work with certain vendors and inventory levels by the way Kimberly, to your point that maybe we can help with our markdown rates even a little more than we thought. I think all of our teams would say yes to those things. And so I think on the merchant side, which is a big chunk of what allowed us to deliver the margins right, Scott, in the quarter. I think we did have some pretty good learnings. I just don't know if we can move it to that degree on the margin rates over there long, long-term. Over the next few years, I think, yes, some good learning. Good question.

Okay, great.

Yes. I think on the expense side, it's a mixed bag. I mean a lot of the savings that we got in the second and third quarters were due to just shutting things down that would not necessarily be good for the business for in a looking out over a couple of years such as some of the advertising and capital and others which really cut to the bone which certainly we've benefited by. There are certainly areas that will be less, I don't think there are hundreds of millions of dollars like on travel and others which we will certainly have learned and we'll certainly do different things and some occupancy and other things which will benefit us in the very long term. But on the other hand, there are costs such as whether its wages in the distribution center or freight costs which are to be determined whether they are going to -- are they incrementally up and on what that growth will be like. So a net-net it's still -- it's -- we're still not -- it's not clear exactly how it's all going to play out.

Especially, on the expense side.

On the expense side.

Kimberly, whereas on the merchandise margin side, I think, yes, there is definitely some learnings and more tangible things we can look to the future and say we should be able to use some of that for the future. I think the expense items are a little.

Right. I do think given our cash position and we'll have to see it's an uncertain environment, but we'll have to see how, where we end up at the end of the year going into the first quarter, but given the strength of our balance sheet at the moment, we certainly took on the COVID debt that we did in the early April timeframe that certainly we would look to as we're doing in the marketplace today, we would look longer term to try to delever the balance sheet as we move through next year and getting rid of some of those incremental interest costs that we had.

That's great. Thank you for that color. That was extremely, extremely helpful. And I just wanted to quickly follow-up Ernie on something you said in your prepared remarks, you said something about there are limits on how severely you would be willing to shift your mix of goods in the short term as more people stay at home. And I was just wondering if you could just add a little color to that, that'd be great.

So, we have actually been running on our trending. This is about how drastically would we shift our category mix, right, within the stores and I would tell you that we have, at this point without being too specific, we have been running at a little over half of our business that's being done at this point which is not the case quarter ago, in the hot, what you would call, the hot trending categories or departments within the business, and a lot of those obviously were the ones that we have benefited from a COVID environment. And then the others, so but that still leaves you with a chunk of the store that the one reason we were able to achieve a minus five is we were not -- you can't drop 80% in those other areas of the store, we wouldn't do that we wouldn't only run a minus five does that makes sense. So what I was trying to bring as a balance and in a treasure hunt shopping experience, we wouldn't want our store, we wouldn't want a TJ Maxx or Marshalls to be a home-only store, right, walk-in and that two-thirds of the store is home, that would not be a healthy thing. I'm giving you these extreme cases because I'm trying to answer your question without giving the exact numbers. But little over half of our business was done in the hot trending areas so that was very aggressive we got there very quickly. And then we're going to watch that balance, we actually continue to drive those hot businesses over the next three to six months, but we buy so hand to mouth as you know we can adjust based on trends, but we believe those hot categories will stay hot over the next six months anyway, as Home will go longer than that for sure. We just are trying to do as good as -- our merchants are doing a very good job on the non-trending areas, you would call them, and really trying to do the best mix of excitement in value. And we always talk about good, better and best brands et cetera and levels of product, in all of those areas that even aren't considered hot our merchants have been going out and really trying to deliver a great excitement and do maximize the sales, the demand that's out there, we want to maximize the sales within that demand that's out there on those non-trending areas. So, that's why I was trying to say we want to limit, we don't want to artificially swing a pendulum too far which as you know retailers can do that sometimes, you can get yourself into trouble.

Yes. And Kimberly, I would just add to that, that we're on some of those -- both the trending and the non-trending areas we're buying better in both. So one might not expect that, but we are and the second thing is...

Kimberly, you can see that Scott has been trying to get closer to the merchandising area of reason.

I'm not going to take the debate on that on the call, but also I think going back to what Ernie was talking about market share opportunities. Look, as Ernie said, we are still very much in business in many of those non -- in all of those non-trending categories and once customers start coming back both the ones that are in our average basket is up, so the average basket up is because they're curating their business to go a little less once they get more comfortable and don't want we're going to have more shopping visits from our existing, let alone the new customers, but once the customers who have been shopping come back in some of these non-trending categories they are shopping elsewhere, it was mentioned earlier, whether it's online or at the mass merchants, and I think those -- a lot of that those that benefit that others are getting, they're going to be shopping and getting going to our store for the values we have in those not trending categories. So, I think we will get market share back not just from the closed stores, but from others.

Absolutely.

Who have benefited that once customers shop more in and want to and are comfortable going and doing multiple visits. We're going to get more than our fair share.

Excellent. Thank you, both.

The final question of the day comes from Alexandra Walvis [Goldman Sachs]. Your line is open.

Good morning, thanks for taking my question here. I had two questions, so one on HomeGoods, any thoughts at this stage on this -- on the potential for that online business as impacts as a percentage of the total and anything on the margin implications of that and given the cost of shipping some of that Home products? And then my second question which is a follow-up on this great discussions, Scott any thoughts at this stage on how much of the headwind that could be in the medium term as we go into next year or a little too early to talk about that?

Okay. I will -- okay, so on HomeGoods I want to make sure I know I heard the first part. So we are -- so this is so early, so we're going to -- we're planning right now on launching HomeGoods.com in the back half of next year. And so right now, obviously, it is not something we would be giving our numbers out as to what we're expecting to do for business. Again what I would say is we're hoping it's going to be complementary to our stores because the way we might orchestrate HomeGoods.com will be different than some other home retailers because we have so many brick and mortar HomeGoods stores where we feel we can encourage a visit based on an online purchase and encourage not just the return but a potential visit to the store as well, as well as obviously do straightforward HomeGoods purchases. So, we're still again very pretty much a year away from the launch of this so we will not have any tangible numbers that we will be giving out on that at this point. And I'm sorry on the second part of the question was that about margins or on HomeGoods or...

Yes just the margin implications on HomeGoods specifically of building an online business given some of the...

Yes, clearly it is not the same. It is a, I guess you would call it, a de-lever right, Scott to begin with without a doubt. Our mission here though is for the future. Again, it's more of a longer-term play to capture market share over the next five years. And there were so much, it's a bit of a tiger by the tail I would call with HomeGoods anyone that knows HomeGoods customers and their passion for it knows we are I think going to do a decent amount of sales fairly quickly. We're also going to try to help with the profit though we're going to operate this differently. I can tell you this, we're going to set it up where it's being done as a -- we would call it in conjunction with our HomeGoods business where we're going to take inventory that's been bought for HomeGoods and use that to funnel to our online business. So, we're going to be more efficient in the organization that we set up there from a cost perspective, different than most online businesses when you set it up as an entirely separate team. This will have only a small separate team where it's working in conjunction with our planning and our inventory HomeGoods and basically peeling the goods off from that. So that's going to be a really neat approach for us on it; so we're very excited about it.

Yes. And not to end with negative news on some of the costs, but you alluded to the cost. So two other things one Ernie alluded to is the, probably the biggest one for the quarter is just the fact at the moment that we have 471 stores closed not in our control based on government announcements and current guidelines and they're closed in a point in time right now through sometimes the early December, where that impact is could be 3% to 4% of our sale. So if you do the math that's a significant amount of dollars and it's probably the biggest impact to the fourth quarter. And the second, you alluded to is on freight. Yes, freight cost will be going up. I think right now, we're paying higher rates, this will probably start to -- we will hope go down as we move through next year, but it could be 30 to 40 basis points of incremental deleverage in the fourth quarter. Again, but I think our guys have been doing a great job of getting the product and delivering it to our distribution centers.

Thank you, Alex.

Great. Thank you for all the color.

Thank you, Alex. Okay. So I think we've reached the end of our call. I thank you all for joining us today. We will be updating you again on our fourth quarter earnings call in February. And from the team here at TJX, we hope you all stay well and we wish you good health. Take care everybody.

Ladies and gentlemen, that concludes your conference call for today. You may all disconnect. Thank you for participating.